China National Petroleum Corporation (CNPC), the parent of PetroChina, is entering the Shandong market, China's oil heartland, using a new approach.
This approach is different from other central-administered state owned enterprises (COEs) because CNPC and a few Shandong local refineries will join forces to start a new company, Shandong Refinery Investment Co., Ltd, with registered share capital of up to one billion Yuan. CNPC will use crude oil as bait to the local privately-owned refineries instead of taking them over.
The Market Pattern is Changing
“CNPC will cooperate with Shandong local refineries instead of taking ownership of their assets,” said Tan Shaohua, Deputy Director of Shandong Oilfield Office, clarifying rumors of CNPC acquiring Shandong local refineries.
On behalf of the provincial government, Shandong Oilfield Office will invest 150 million Yuan, while CNPC will hold more than 50% of the shares.
CNPC will use this new business to apply with the government for a qualification to import crude oil. This new firm will act as an agency, purchasing crude oil and then selling refined oil products, processed by these local refineries.
“All local refineries require crude oil. Due to short supply of it, local refineries have struggled to survive for many years,” said a senior person from a local refinery.
Shandong is an important market because the province has the most refineries in China. There are 21 refineries that account for 60% of the total capacity of China’s privately-owned refineries, having a total refining capacity of 80 million tons.
The central government has allocated 1.7 million tons of crude annually to Shandong’s local refineries since 1999. Even though refining capacity has increased from 26 million tons to 80 million tons, the allocated crude has stayed unchanged. So to fill capacity, refineries use fuel oil, but the end product is of bad quality with high costs.
Shandong provincial government and CNPC signed a Cooperation Framework Agreement in 2010 as a strategic cooperation. According to the agreement, both parties will collaborate in the oil and gas pipelines network, oil refining, a sales network for the refined oil, urban fuel, etc.
A similar situation occurred with two other COEs. When these firms first entered the Shandong market, they also signed a corporation strategic agreement with local provincial government. However, they took over the ownership of local refineries, unlike CNPC.
In 2007, CNPC planned to invest and build a refinery that has a capacity of ten million tons in Shandong to enter the market there, but was rejected. While CNPC’s rivals, China National Chemical Corporation and China National Offshore Oil Corporation (CNOOC), have stepped into the Shandong market by owning local refineries.
However, acquiring local refineries has its disadvantages. It requires a time-consuming negotiation, involved with purchase price, settlement of staff and technological capital investment. Since 2008, CNOOC has only acquired two refineries in Shandong. While CNPC, through a joint venture, can form alliances with many local refineries in a short period of time.
A Multi-Win Result
Local refineries have a hard time obtaining qualification to import crude oil. In China only state-owned companies are licensed to import crude oil.
Liu Aiying, Chairman of Shandong Petroleum Refinery Association, mentioned that back in 1999, Shandong local refineries and petrochemical enterprises founded Shandong Petrochemical Ltd. to fight for the qualification to import crude oil, but still failed to do so.
An insider from CNPC believes this cooperation will benefit all parties: Shandong provincial government will be able to further strengthen regional energy development through CNPC, CNPC will be able to enter this market, and local refineries can get needed crude oil.
Some experts do point out that many local refineries will just become oil processing plant for CNPC, even though they retain ownership.
Impact on Privately-Owned Gas Station
A refinery is now the middle section of the oil supply chain. Previously Shandong refineries were the main and cheap supply to privately-owned gas stations nationwide. The Oil Chamber of Commerce of Guangdong province, Hebei province, and other provinces purchased large amounts of refined oil in 2009 and 2010 from Shandong during a shortage.
Shandong’s refining capacity is fixed, so most of the refined oil by local refineries will now go to supply CNPC. Consequently, the amount of refined oil able to reach privately-owned gas stations will decrease, making it harder for them to get it.
A privately-owned gas station worker worries that their only supply channel will disappear after Shandong refineries cooperate with CNPC.
Source:eeo